Understanding Credit Utilization: The Key to a Higher Score
Unfortunately, it’s extremely tempting to use our entire credit lines at once. If it’s available, why not use it? Well, your credit utilization has a major influence on your credit score. In fact, this ratio accounts for 30% of your FICO score, making it the second most important factor on your credit report. In other words, having a low credit utilization ratio is the key to a higher credit score. Here’s why:
What it Means
Your credit utilization is the percentage of how much of your total available credit you’re currently using. For example, if you have a credit line of $1,000 and you’re using $200, your credit utilization ratio is 20%. This ratio is used to determine your creditworthiness.
How Creditors Use it
Creditors and lenders look at your credit utilization to determine how well you manage debt and how likely you are to pay any new debt. In short, they use it to assess whether you are a good person to lend money to. Often, the terms of a loan or credit card will depend highly on your credit utilization. If your credit utilization is low, generally meaning between 10%-20%, creditors will likely give you better terms on a loan or credit card than if your credit utilization is higher.
How it Affects Your Credit Score
Credit utilization is considered highly influential to your credit score. In fact, it accounts for 30% of your FICO score. So, it’s a big player – actually the second biggest player behind on-time payments. In general, having low credit utilization benefits your credit score. Meaning, you should aim to have more credit available rather than used. This is a good way to improve your overall credit score.
How it’s Calculated
Calculating your credit utilization is a pretty simple operation. This percentage is calculated by dividing your total credit card balances by your total credit line limits, then multiplying by 100. Make sure to use the total balances and total credit limits of all your accounts. If we used our previous example, we would divide 200 by 1000 and get 0.2. Then, we’d multiply that number by 100 and get 20. Meaning our credit utilization is 20%. See, it’s easy!
How You Can Improve it
Now that you understand credit utilization and how it impacts your credit score, it’s time to work on improving it. The goal is to do anything that will increase your available credit. How exactly can you accomplish this? Well, there are a couple things you can do:
- Pay down balances: The more of your outstanding balances you pay down, the more credit becomes available.
- Request credit line increases: Even if you’re not paying down your balances by a significant amount, requesting credit line increases can result in more available credit.
- Do a balance transfer: The idea is to transfer your debt from an existing account to a new one, hopefully one with better interest rates so you can pay it down quicker. Doing so also increases your available credit, because you’ve technically “paid off” one account by opening another. So now, your old account, which was all debt, is now all available balance.
- Use financial concierge services: Financial concierge services from AutoPayPlus help you pay down credit cards faster by matching your payment schedule with your paychecks. By consistently paying biweekly or weekly payments on an automated payment system, you can pay off credit cards sooner, which effectively reduces your credit utilization over time.
Also keep in mind the 30% guideline. You should aim to only use 30% or less of your total available credit. For example, if your total credit limit across all your accounts is $10,000, aim to use below $3,000 total. Doing this reflects well on your credit report.
At AutoPayPlus, we know how important your credit score is to unlocking financial freedom. We help you manage all your loans in one place, pay off debt faster and protect your credit with payment plans and budgeting tools made just for you. Join the 500,000+ AutoPayPlus Members who are working toward brighter financial futures by giving us a call at 800-894-5000 or schedule an appointment with a Payment Concierge.
